January retail sales up (but then down).

By David Bailey on Feb 8, 11 11:35 AM in Economics

It was all over very quickly. A brief spurt of retail spending in the early days of January boosted retail sales last month, but that boost was soon followed by a fall in the second half of the month as confidence waned.

Overall, the latest survey by the British Retail Consortium (BRC) shows that retail sales were up by 2.3% on the previous January. As expected, this was boosted by pent up demand from the snowy December when the bad weather stopped many people from getting out to do their shopping. The early surge was also aided by discounting ahead of the VAT rise.

The BRC's Director General, Stephen Robertson, noted that "On the surface, this is the best sales growth since last March, but that's not the whole story. Comparisons are with a feeble, snow-hit performance a year ago. Growth this January was driven by a relatively short but strong burst of non-food buying early in the month. Clearance discounts and a last chance to beat the VAT rise got people buying things like furniture and electricals in the first few days.

"Later in the month sales of non-food goods slowed, particularly for bigger items, as the reality of worries about jobs and personal finances returned to customers' minds," he added. The latter is in line with comments by the Banks of England Governor a few weeks ago on the squeeze in real wages taking place.

The figures and comments will further add pressure on the government to come up with a 'Plan B' and to look at how it can generate growth. Simply cutting the deficit was anyway never going to be enough, and there is growing concern that the planned speed and depth of cuts is already impacting on consumer confidence.

Later this week, the Bank of England's Monetary Policy Committee (MPC) meets to decide if it should change base rates. While most economists expect the MPC to keep rates on hold at 0.5%, critics are arguing that the Bank needs to raise rates to retain credibility and to choke off inflation which has been running well over the target of 2% for some time.

But others have warned that increasing rates too soon could kill off a clearly fragile recovery.

And more surveys results, this time from the Royal Institution of Chartered Surveyors (RICS) are likely to underline such concerns.

The latest RICS survey figures indicated ongoing weakness in the housing market. RICS spokesman, Ian Perry, noted "The key indicators of market activity remained in negative territory in January, albeit a little less so than in December. Uncertainty over the prospects for employment, alongside the shortage of mortgage finance, particularly for first-time buyers, continues to weigh heavily on transactions levels."

The RICS survey is closely watched, and its most recent report show some 31% of RICS member estate agents reporting a fall in house prices in the month.

The survey follows two conflicting reports, one from Nationwide pointing to a downturn in activity, and one from Halifax reporting a rise in house prices. The RICS report indicated that 7% of surveyors reported a decline in new buyer inquiries last month, with potential buyers cautious about "the outlook for the economy and the possibility of mortgage rate increases later in the year".

Add in recent figures from the Bank of England which showed that bank lending to real estate in the last quarter of 2010 dropped by £16 billion between September and December (the largest fall in a single quarter since the series began in 1987) and you can see the tight corner that the Bank of England is squeezed into.

What's interesting is that despite base rates currently being at 0.5%, some potential buyers are finding it difficult to access mortgage finance.

There's a broader issue here. The government's whole strategy is dependent on a tight fiscal stance to cut the deficit and shrink government, in the hope that the combination of a loose monetary policy and competitive exchange rate will meanwhile help the private sector to flourish and rebalance the economy.

But we continue to see signs low levels of lending to business - as well as poor lending figures in the property market - suggesting that the ultra low base rates are not be being passed on to businesses looking to borrow to invest and many of those looking to buy homes.

As John Clancy has highlighted in his blogs, the availability of loans at acceptable rates and terms remains a key problem for business and it is this legacy of the credit crunch which will damage prospects for recovery unless very real action is taken to reform the banking system so that business can borrow, invest and grow capacity.

Professor David Bailey works at Coventry University Business School

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